The Congress-led United Progressive Alliance on Friday undertook a series of politically contentious policy changes that seek to kick-start economic reform Photo: PTI

Updated: Sat, Sep 15 2012. 05 24 PM IST

New Delhi: In an abrupt change in stance and risking its own survival, the Congress-led United Progressive Alliance (UPA) undertook a series of politically contentious policy changes that seek to kick-start economic reforms.

Not only did it free retail of its foreign investment bindings, it also opened up the civil aviation sector to foreign airlines. At the same time, it announced a fresh round of disinvestment of government shares in public sector undertakings that would, if successful, net the government some additional receipts; together with the Rs.20,300 crore saving achieved through a correction in fuel prices, the move should provide some fiscal relief to the exchequer.

While the bold initiatives have won the government praise from Indian industry and foreign investors alike, it has invited the collective wrath of the Opposition as well as some key allies such as the Trinamool Congress (TMC)—the party put the UPA on notice and has not ruled out the withdrawal of support from the government.

More political trouble could be brewing for the UPA after the Supreme Court on Friday took cognizance of a public interest litigation and asked the government to reply within eight weeks as to whether there had been violations in the allocation of coal blocks. The national auditor, the Comptroller of Auditor General of India (CAG), has said that there was wrongdoing in the allocations and estimated the loss to the exchequer at Rs.1.86 trillion.

Meanwhile, defending the government, Prime Minister Manmohan Singh said the measures were aimed at promoting economic growth and generating employment in “difficult times”.

“The cabinet has taken many decisions today to bolster economic growth and make India a more attractive destination for foreign investment,” Singh said in a press statement.

The package

The UPA cleared the litmus test on economic reforms by allowing 51% foreign direct investment (FDI) in multi-brand retail and relaxing key conditions on 100% FDI in single-brand retail. It eased the clause on sourcing of 30% of the value of products sold through single-brand outlets from the small-scale sector by making it optional. It also amended the clause that mandated a foreign investor should be the owner of the brand. While this will help Swedish retail giant Ikea, which has applied to set up shops in India with an investment of ☺€1.5 billion (Rs.10,695 crore), it may also revive a proposal by Spanish clothes retailer Zara that was rejected by the Foreign Investment Promotion Board (FIPB) for not abiding by the earlier clause.

The decision to allow 51% FDI in multi-brand retail was initially taken in November. However, with resistance from allies such as the TMC and opposition parties, the government deferred its implementation. Unlike the last time, it has left the implementation of the move to open up retail to individual state governments. A statement by the government later said while states of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Manipur Jammu and Kashmir, and the Union territories of Daman and Diu and Dadra and Nagar Haveli, have expressed support for the policy, states such as Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Orissa have expressed reservations.

The government also gave a three-year period to investors to set up the back-end infrastructure that includes capital expenditure of all kinds. Such a timeline was also missing in the earlier notification.

Similarly, the UPA has also diluted its earlier restriction of limiting multi-brand outlets to 53 cities with more than 1 million population. It has now said that the states would have the flexibility to implement the policy even if they do not have any city with a population exceeding 1 million.

Akhil Gupta, chairman of Blackstone India Advisors, a global private equity firm said, “This is what India has been waiting for. India is in a unique place in the world with a strong structural story for high growth for a decade or two. All we needed was a demonstration of the government’s resolve to take tough decisions.”

Similarly, Raj Jain, president, Walmart India, and managing director and chief executive officer (CEO) of Bharti Walmart, said allowing 51% FDI in multi-brand retail was an important first step for the government to further liberalize this sector. “This policy change will allow us to connect directly with the consumer and save them money. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation,” he said.

Josefin Thorell of Ikea Group said it remains hopeful that it will soon be able to set up its first store in the country, subject to 100% approval of its application by the government.

The government also cleared a key demand of Kingfisher Airlines Ltd by allowing foreign airline investment in Indian carriers, throwing a lifeline to the cash-strapped Vijay Mallya carrier. In November last year, Singh had said, “We have to find ways to get Kingfisher out of trouble.”

Justifying the move, a government statement said: “Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure.”

Mallya, who is in London, applauded the government. “Bold decisions taken by government. Fantastic to restore confidence and kickstart economic growth opportunities,” he said in a tweet from his official Twitter account.

Foreign airlines can now own a 49% stake in a Indian carrier subject to conditions. These include the carrier being registered in India, its principal place of business is in the country, and that its chairman and two-thirds of directors are local citizens. Besides this, substantial ownership and effective control has to remain in Indian hands.

Foreign carriers were noncommittal. Lufthansa said it has no investment plans. “Lufthansa has no plans to invest in any Indian carrier,” the carrier said in a email reply.

British Airways South Asia regional commercial manager Christopher Fordyce said his airline was bullish on India and keen on investing in the country. “However, we are not considering any investment in Indian carriers at this point of time though India is a very important market. Also, we are very positive about liberalizing the airline industry,’’ he said.

Etihad Airways was upbeat about the announcement. “Etihad Airways has identified equity investments in other airlines as an important evolution of our successful partnership strategy,” the airline said.

The government also allowed FDI up to 74% in direct-to-home, teleports and cable network services compared with the present limit of 49%. While FDI up to 49% will be through the automatic route, beyond that it has to seek clearance from FIPB. Currently, there is no specific dispensation under FDI for mobile TV. It has now been decided to permit FDI up to 74% in this. However, the existing limit of 74% foreign investment in the headend in the sky (HITS) broadcasting services will continue.

S.N. Sharma, CEO of Den Networks Ltd, a cable television network company, welcomed the move. “It will boost the ongoing digitization process. This will help consolidation in the sector and allow companies to invest in developing cutting-edge products and services for the consumer. It will also allow cable companies to start investing aggressively in broadband infrastructure services and help evolve a healthier ecosystem for all the stakeholders,” he said,

Not only does the UPA have to contend with strident political criticism, some industry representatives have also questioned the move to open up the domestic civil aviation sector to foreign airlines.

“It is bad that a national policy is being changed for a badly-managed single company, and will result in selling airline stakes in one of the most important aviation markets cheap,” said an airline consultant, requesting anonymity and referring to Kingfisher Airlines. “It works to the advantage of the dominant Middle East carriers, who have exhausted their bilateral capacity.”

But more worrying is the criticism from within the UPA, especially the belligerence exhibited by the TMC.

TMC supremo Mamata Banerjee raised the prospect of “hard decisions” if the government did not roll back the fuel price hike and Friday’s decision to liberalize FDI in retail. “We are very much serious about these developments and ready to take hard decisions if these issues are not reconsidered,” the West Bengal chief minister said on her Facebook page. “We cannot support price hike of diesel and reduction in subsidized LPG cylinders. Today, a decision has been taken allowing FDI in retail sector. It is a big jolt. We are really sorry. We cannot support anything that is against the interest of the poor and common people. Loot cholchhe loot (Loot is going on).”

TMC general secretary and railway minister Mukul Roy told PTI: “We are giving a 72-hour deadline to roll back the decisions. We will discuss and take a tough stand at the TMC parliamentary party meeting on Tuesday, if the government does not listen to us,”

Meanwhile, the Bharatiya Janata Party (BJP) and the Left parties also stepped up their rhetoric.

“The BJP strongly opposes the government decisions as it brings our financial autonomy to risk. We will protest against this anti-farmer, anti-trader decision on the streets of the country. The situation has reached a point where enough is enough,” BJP leader Rajnath Singh said.